I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

For Social Security's Sake, Payroll Tax Will Be Raised Again

President Obama proposing an extension of the payroll tax cut, adds employers to the mix as well Thursday night. Payroll taxes are the primary source of tax revenue for Social Security.

Social Security looks like it will lose its main source of funding yet again. Another payroll tax cut will require the U.S. Treasury to pick up the slack, and chip in. At least until taxes are raised.

President Barack Obama suggestd steeper payroll tax cuts in his jobs speech to Congress on Thursday, this time including cuts for employers along with another round of payroll tax cuts for employees.

The $447 billion jobs plan tilted heavily toward what House Republicans have been calling for on the tax front. Tax cuts account for more than half the dollar value of the president’s latest plan to jumpstart the economy. Obama is essentially daring his adversaries to oppose a provision that would extend and deepen payroll tax cuts due to expire Dec. 31.

Before the temporary payroll tax cut last year, employees and employers paid 7.6% in FICA payroll, of which 6.2% went to social security and 1.5% went to Medicare. The Medicare portion was never cut, but the social security portion was reduced mainly because the social security fund is still bringing in more money from tax receipts than it is paying out in benefits at this time, says Abdur Chowdhury, a professor at Marquette University and economic advisor to the Chicago Federal Reserve.

Under the proposal, employees who already went from a 6.2% reduction in payroll taxes to 4.2% in 2010 will pay 3.1% in 2012 if approved by Congress. The tax is for income up to $106,8000 and then after there there is no FICA tax, including no Medicare tax for one year. Employers could also see a payroll tax deduction this time down to 3.1% up to the first $5 million in wages. There is also a secondary benefit exemption of FICA taxes on wages paid above $50 million. In theory, an estimated $3.1 billion in savings on that $50 million in hypothetical new wages could lead to hiring or higher salaries, says David Kautter, executive-in-residence at the American University’s Kogod School of Business.

The payroll reduction will unlikely last more than a couple years.

“The payroll tax will have to go up at some point,” Kautter says.

Right now, the government has the U.S. Treasury giving the Social Security Administration what are essentially IOUs in order to guarantee the funds that are being lost from the current tax break. The SSA lost over $112 billion from payroll taxes last year.

“The Treasury cannot issue IOUs forever. Once we are no longer in a surplus, the government will have to raise taxes,” Kautter says.

Assuming the payroll tax break is extended, at least another $112 billion will be taken from Social Security on the employee side, and at least that much will be taken from the employer side, for an additional $224 billion in 2012. That is already added onto the $112 billion in 2010 and around the same for 2011. Required Treasury debt to make up the difference will be at least $448 billion.

In 2009, the Social Security Administration trust fund had around $2.6 trillion in its coffers earning near zero percent interest. It paid out $685 billion and took in over $800 billion. The surplus is expected to be a little lower this year until it slips into a projected deficit by 2015. Three and a half years away, warns Chowdhury.

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